Dislocated markets offer opportunities for the nimble and boutique asset managers are well positioned to carve out niches. Since the financial crisis, boutiques have increased their market share, according to data from information provider Lipper, as many investors have been disappointed with bigger rivals.

While boutiques can offer sector specialist knowledge, greater freedom in the investment process and exposure to growth markets, the boutique model faces the same hurdles as the rest of the industry - increasing regulation and the pressure to consolidate.

Financial News invited a panel of experts to discuss the issues facing boutique asset managers in a live online discussion sponsored by SunGard Asset Arena 360.

Since the financial crisis, boutiques have increased their market share, according to data from information provider Lipper, as many investors have been disappointed with bigger rivals

Yasmine Chinwala
(Financial News):
Has size become more or less important since the financial crisis?

James Barham
(River and Mercantile):
I am not sure size is that important – there are very good large fund management companies and there are very good small, boutique fund managers. Some investors will derive comfort from the size and name of an asset manager. The most important thing, however, is the quality of fund managers and their investment process as well as the investment environment in which they work.

Obviously, certain events during the financial crisis have had an impact on both large and small companies, such as the Bernie Madoff scandal and the collapse of commodities broker MF Global. This has raised the level of scrutiny fund managers apply, which is a good thing.

Regulation has increased, including the introduction of a remuneration code. This has probably had a greater impact on larger fund management companies than on the boutiques, which have the flexibility to reward success.

Diana Mackay
(MackayWilliams):
There is no doubt that the market has changed dramatically. The financial crisis has seen the withdrawal of mainstream investors, and those that remain are sophisticated, high net worth individuals and institutions that are looking for quality and committed investment management propositions. In such an environment, boutiques can do very well and indeed have done well.

But there is also a place for very large asset management groups because they provide the comfort factors that even sophisticated investors demand, and indeed brand has become one of the biggest differentiators in selecting a fund. In a way boutiques and large firms are balancing each other out. That leaves the middle ground where differentiation can be an issue.

James de Uphaugh
(Majedie):
Liquidity is one of the key defining features of a boutique. It is very important to right-size your business to cope with the current liquidity environment. Liquidity has become less freely available so, if anything, being small is more important than it was six or seven years ago.

Paul Compton
(SunGard):
During the crisis there was clearly a flight to quality and in the investment world that meant – at least temporarily – that investors fled to larger, well established names; whether they represented quality is moot.

What is definitely not a temporary phenomenon is that the big firms are getting bigger, and it makes sense if a business is about scale. We know there is enormous space for smaller managers to flourish if they have a product that they can differentiate and prove quality.
The middle ground is perhaps less desirable – nobody wants to be a “me too” manager in the middle without the ability to run a business on an industrial scale.

James de Uphaugh
(Majedie):
The middle ground in any market is very dangerous because it is a grey area and you have to be very clear about what you stand for. Yes, there is a fantastic place for the big players, but there is also a wonderful opportunity for good boutiques to thrive with the right products and decent performance.

James Barham
(River and Mercantile):
One of the challenges for a boutique is the different audience groups between retail and institutional. It is harder for a boutique to compete in the retail market where regulation makes it much harder to operate.
The institutional space is well suited to the boutique and it is an environment in which they are flourishing at the moment.

• Definition of a boutique

Yasmine Chinwala
(Financial News):
How is an asset manager classified as a boutique and what does it mean in terms of size of assets under management?

Paul Compton
(SunGard):
You know a boutique when you walk into one: a building where there are several dozen employees, where everyone knows each other and everyone has their role. It might be multifaceted but everyone is engaged with the process. At the other end of the scale there are organisations with 100 to 200 employees on different floors and in different functions. People in marketing may not know who produces the figures for investors. To me that is what sums up a boutique, more than the size of assets under management.

James de Uphaugh
(Majedie):
I agree. At Majedie we all work in one, big room: the investment desk, the marketing and client area and the operational team, each staffed with people who are at the top of their game. It is that culture that really defines a boutique and is one of its biggest assets and one should not do anything to put it at risk.

Yasmine Chinwala
(Financial News):
How would a boutique be defined in terms of assets under management, or is it irrelevant?

Diana Mackay
(MackayWilliams):
I don’t think AUM is helpful. The issue is about independence. Fund selectors are looking for managers that stand and fall by their investment decisions; they are looking for real commitment. Large bank-owned players raise the question of where their commitment lies. Is the bank going to change its policy and have all its distributors sell deposit products, for example, or is it going to commit to funds? Such a difficult balance in large businesses can create problems, and investors are starting to move away from that kind of organisation.

James de Uphaugh
(Majedie):
I think AUM is definitely a building block of a boutique. We have about £6bn in assets under management because we think that is the appropriate level for us as a business.

Yasmine Chinwala
(Financial News):
Did you deliberately introduce a cap on AUM?

James de Uphaugh
(Majedie):
Yes, it gives us a good chance to deliver performance for our customers. I think if you were to double that in the UK market, you would struggle.

James Barham
(River and Mercantile):
The most important thing in a boutique is the owner operator model – the alignment of interest of all the key stakeholders, from the fund manager, the owner and the operator to clients themselves – absolutely critical.

• The pros and cons of mergers in an uncertain environment

Yasmine Chinwala
(Financial News):
Viewers are keen for the panel to discuss consolidation and the implications for boutique asset managers. Haresh Mandhayan at ING Investment Management asks: “Is now not the best time for consolidation when smaller asset managers can come together and fight with big players?”

Also Emmanuel Collinet de la Salle, global head of wealth management business development at BNP Paribas Investment Partners, asks: “In the current environment, do we not expect more consolidation in the asset management industry?”

Diana Mackay
(MackayWilliams):
The grey area of mid-sized investment firms is where talk of consolidation is taking place. MackayWilliams research among European fund selectors has found that their expectation of consolidation is huge, but we have not yet seen any evidence of it happening. This market of about 35,000 funds has remained fairly static and is not shrinking, not noticeably.

What I think the fund selectors are really saying is that there is not enough quality and too much mediocrity. The middle ground has to differentiate itself, not just in terms of size but in what is really important, such as quality investment propositions.

James Barham
(River and Mercantile):
I don’t know whether we have had a huge amount of consolidation. It is a natural part of the cycle for businesses to acquire other businesses and, as a result of that, people will leave and create boutiques again. But I don’t think we are in any particular stage or part of the cycle at the moment that is leading to consolidation.

Diana Mackay
(MackayWilliams):
It is too hard to consolidate, to be honest. First, it is extremely difficult to merge funds and you usually lose assets. There is no really big incentive to merge. We will see less growth, or less proliferation, but I can’t see any major consolidation.

Paul Compton
(SunGard):
At the asset management business level there has been consolidation; the number of funds may never change, but it just seems to be entirely normal. Like any other industry, there will always be value in having an entrepreneurial business with all the advantages of creativity and focus on your customer and the alignment of interests that brings.

James Barham
(River and Mercantile):
The viewer asked why boutiques don’t simply get together to “fight” the large companies. I am not sure that putting together a random selection of boutiques is the right thing to do, because whenever there is consolidation or any form of corporate activity, it is key to ensure that it has a strategic logic. The aim must be to improve the quality of the fund management and distribution, or to achieve operational cost efficiencies.

Paul Compton
(SunGard):
From a back-office perspective, I completely agree that there is no point in putting together entrepreneurial businesses just for the sake of it. But we are seeing increasing interest from smaller managers in outsourcing as much of their routine operation as possible – the operational issues that are essential but can be time consuming. That is perhaps an area where a boutique can gain some of the benefits of scale without losing what they do.

Diana Mackay
(MackayWilliams):
In France there is a very interesting example of a company that has established a series of incubated boutiques, each part-owned by the managers and specialising in a particular sector. The group owner does all the back office operations, such as compliance and risk management. It provides the infrastructure, but also allows the small boutiques to do what they are good at. It will be interesting to see if it will work in the long term.

Yasmine Chinwala
(Financial News):
Is that a brand new business model or something that we have seen before?

James Barham
(River and Mercantile):
The outsource model already exists. The reason Majedie and River and Mercantile can compete with large organisations is because of that outsourced business model. The important thing to remember is to focus on our core competencies of fund management and distribution. Those parts of the organisational structure cannot be outsourced. Everything else can be, but outsourcing is not a fire-and-forget missile; you can’t just tick the box and say you’ve dealt with it. It is essential to have the skills to manage those outsourced relationships as though they were part of your own organisation.

James de Uphaugh
(Majedie):
You have to be cautious about the extent of your outsourcing. Clients see those outsourced functions as part of your responsibility.